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Distributive Politics and Economic Growth. A Brief Summary John Morrow January 31, 2007. The Question. What implications does the income distribution have for economic growth? How examined:

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distributive politics and economic growth

Distributive Politics and Economic Growth

A Brief Summary

John Morrow

January 31, 2007

the question
The Question
  • What implications does the income distribution have for economic growth?
  • How examined:
    • Formal model which concludes that inequality causes “too much” taxation due to redistributive aims of “poor.”
    • Growth regression w/Gini. Model suggests coefficient on Gini should be negative.
agents
Agents
  • Continuum of agents own k and l with inelastic labor supply and aggregate labor normalized to 1.
  • Agents are heterogeneous in capital ownership. Conflict over income distribution occurs in the political arena.
  • Conflict resolved by simple majority voting, Median voter theorem determines outcomes.
economy
Economy
  • Aggregate Production y given by aggregate k, l, and government supplied public goods g.
  • g created through a capital tax tau so that
  • Put together with l=1 and things are pretty
hand waving
Hand waving
  • Turns out for some special preferences that in equilibrium the income distribution is fixed and growth rates of capital and consumption are fixed.
  • Means we can think of the dynamic model as static. Turns out that the growth maximizing tax rate at all times is:
  • tau star corresponds to the preferred tax level of an agent who’s ratio of labor to capital is 0.
voting preferences
Voting Preferences
  • Everyone wants some tau>0since public goods add to production, but the tax incidence is not equal.
  • Capital owners want lower taxes relative to ”labor” owners. Since g increases the MPL and doesn’t cost much to labor owners, they want higher taxes.
  • Tau is decided by preferences of the Median voter. More inequality means the median voter owns less capital and therefore wants higher taxes.
  • Since the growth maximizing tax is below what anyone really wants, higher taxes associated with more inequality reduce growth.